After Weeks of Losses, China Stock Traders Question Beijing Put

(Bloomberg) -- If there was any optimism that China would soon rescue its tumbling markets, it’s quickly fading away.

Stocks just sank 2.5%, capping their fourth week of losses, while the offshore yuan is edging closer to its record low. Falling equity volume, even on rebound days, showed there’s not much appetite to buy the dip. Foreigners keep selling mainland-listed shares at a record pace. U.S. hedge funds -- who are sitting on a whole lot of bullish China stock derivatives -- are getting burned.

Sentiment onshore remains fragile, with traders increasingly sensitive to shifts in rhetoric out of Beijing and Washington. China’s state media on Friday signaled a lack of interest in resuming trade talks with the Trump administration, whose ban on China’s Huawei Technologies Co. this week also added to the gloom. The intensifying trade war has currency traders talking about whether the yuan sinking to 7-per-dollar is suddenly possible.

The Shanghai Composite Index’s drop below 2,900 points Friday was also bearish. While there was some expectation that state funds would step in to defend that level, there were no obvious signs of national-team buying in the afternoon.

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Yuan at 7?

The specter of 7-per-dollar loomed large for yuan traders this week. Don’t blame the weakness on dollar strength: the currency also dropped against a basket of trading partners for a 13th day, the longest streak on record. A report Friday that the central bank won’t let that happen gave the yuan some brief respite. Analysts say the 7 level is significant because it could trigger a massive outflow of capital.

The offshore rate is even weaker, smashing through a key support level this week, showing overseas traders are more bearish. It has lost almost 3% this month and its discount to the onshore exchange rate is widening.

No clue on bonds

Repeated policy tweaks from China’s central bank are leaving bond traders in the dark when it comes to the cost of buying bonds. The interbank lending market -- typically a source of cheap leverage for government-bond buyers -- has turned the most volatile since 2014. One person at a commercial bank said the swings had rendered her five-year trading experience useless.

The People’s Bank of China has been shifting between easier and tighter monetary policy this year. After making a broad reserve-ratio cut in January, it has been tightening marginally since the end of March as the economy improved. Now, traders are speculating the central bank may loosen policy again after trade talks ended in stalemate and recent data missed estimates.

Read more:

  • China’s rates wildest since 2014
  • April readings come in weaker 

Chart of the week

Daily average turnover on domestic Chinese exchanges is down for a sixth consecutive week, as traders sit out the turmoil (and the brief rebounds).

After Weeks of Losses, China Stock Traders Question Beijing Put

Catching up

Here’s what else caught our eye this week:

  • China’s Starbucks rival Luckin raises $561 million.
  • China’s $112 billion luxury goods market is going online.
  • U.S. traders are betting big on a China rebound.
  • Trump tariffs seal the deal for companies looking to quit China.
  • Baidu posted a loss for the first time since going public.

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